Property prices are falling, but at the moment they are falling like a feather rather than a brick. The key issue is how people will react to falling prices.
Abbey reckons that just over two-thirds of homeowners have no plans to sell or move in the next 12 months. This is pretty much what you’d expect, but what about the other 33%?
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But how reliable are these numbers?
Abbey reckons 1.2 million plan to take advantage of lower prices to trade up in the next year, while 1.1 million intend to downsize to free up capital or reduce their outgoings. More worryingly, Abbey says 827,000 people plan to sell their homes and rent instead.
If that number did actually try to sell their homes for what they can get, prices would certainly drop faster. But in practice, those who say they intend to do something will actually be influenced by many other factors, most importantly the actual price they can get if they sell.
Figures from the Royal Institution of Chartered Surveyors last week suggested that sellers are becoming more realistic and lowering their asking prices. That’s likely to show up in sale prices falling faster in the next month or two, which will surely result in tabloid headlines about a price crash. That will probably cause many of those who expressed an intention to move deciding not to do anything at all.
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Don’t move, improve!
Abbey’s research showing that 39% of those not planning to move plan to improve their homes is confirmed by other research from Sainsbury’s Bank. It says about one in five or some 5.3 million homeowners plan to make improvements in the next 12 months, and that 62% of them will spend over £5,000. The most popular improvements are loft conversions, conservatories and side or rear extensions.
As I’ve said before, the higher rates of Stamp Duty introduced by Gordon Brown are a big deterrent to moving when prices are falling, and many people will be saying to themselves: “Rather than pay £8,000 to the government by moving house, I’ll stay put and spend the £8,000 on improvements.”
While the reduced mobility resulting from a partially frozen property market is bad news for the economy, it’s not necessarily bad news for us. If people simply can’t get housing in the South East, employers won’t be able to hire in people from outside the area and will have to pay their current workers more.
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The unions are doing what they always do
Already public sector workers are squaring up to battle for bigger wage rises, and I expect private sector wages to start rising at a faster rate too, especially in the South East.
As for those who’d like to sell and rent, rising rents (up over 12% in the last year) mean they won’t necessarily benefit from the switch unless they trade down in the type of property they occupy.
Most of us are very reluctant to do this, so the majority will just try harder to cut their outgoings. Still others will turn into LARies - Let-And-Renters, who let out their own home and rent another one.
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Previous property busts may not be a guide
Meanwhile, the larger number of homes being sold each month in the property auctions shows there are still plenty of Buy-To-Let bargain hunters out there prepared to put down the cash for the right property.
This isn’t like any property market we’ve ever seen in the UK before. It’s not like the downturns of the 1990s, 1980s or 1970s. So it’s really hard to know how things will pan out. My best guess remains a slow decline in prices that will bottom out at 10-15% below the peak.
